Creative financing for energy management projects
Leasing can be much easier, and more cost effective, than traditional methods of acquiring energy efficient equipment such as variable speed drives.
Reducing energy costs is the major motivator for industrial companies to upgrade to more energy efficient technologies and business practices. However, constrained access to capital across the world continues to be a barrier to investing in energy efficient equipment.
In mature western economies, corporate access to capital has been highly restricted for the past several years, and the squeeze continues due to slow economic growth and concerns about stability in the Eurozone.
In rapidly developing economies, pressures on capital availability are more subtle; governments are eager to restrict soaring rates of corporate debt out of fear that such borrowing will be unsustainable in the long term. They are building industrial infrastructure that must be financially sustainable long into the future.
Western banks are only gradually easing corporate lending criteria. Despite these conditions, western corporations are extremely keen to have access to capital to invest in energy efficient equipment. As a result, they are exploring alternative methods to standard corporate borrowing to meet the challenge of a tight credit market.
In more rapidly developing economies, such as China and Turkey, the authorities are concerned about ensuring controlled and sustainable growth and are applying pressure on the availability and cost of funds to counter racing inflation and inappropriate borrowing.
Affording energy efficient investments
So how can firms across the world access capital to make energy efficient equipment investments? Even in rapid growth economies, companies with meteoric growth may have reached their borrowing ceiling and yet continue to need financing in order to make further investments, including energy efficiency initiatives. Moreover, emerging market companies want to ensure that their energy efficient investments are financially sustainable in the longer term.
Various forms of asset financing techniques are coming to the fore as effective, alternative methods of funding energy efficient equipment upgrades. These techniques aim to offset the monthly cost of the new equipment against the energy savings that it enables.
In some cases, finance payments even flex with the energy saving or energy generation outputs from the new equipment. These forms of financing—which are separate from standard bank lending—are increasingly important, given that recent research has shown that the greatest concern of corporations is the lack of confidence over whether energy efficient investments will deliver the promised savings. Combined financing and equipment solutions overcome this obstacle since the finance providers in this area understand what the solution should deliver and design the financial vehicle around projected savings being met.
Financing techniques, such as leasing and renting, are increasingly being used in a number of countries to provide organizations of all sizes with financing for energy efficient equipment where the energy savings pay for the equipment investment. Where possible, these techniques wrap everything into one financing package, including energy efficiency assessment, the equipment itself, installation, etc. Payments are at least equal to—or less than—the energy savings. In many cases, purchasing equipment via these alternative financing strategies delivers saving and net positive cash flow immediately after the equipment is installed.
Where a project cannot completely offset the equipment upgrade with energy efficiency cost savings, the financing arrangement can still subsidize a large part of the upgrade cost. In the manufacturing sector, this is often highly attractive as up-to-date equipment may not only lower energy costs, but also boost productivity and extend manufacturing capability, generating more revenue and margin.
A finance agreement under this kind of integrated strategy has the advantage of being tax efficient and offering fixed payments for the agreement term. These are calculated by taking into account numerous factors, such as: the type of equipment, its expected working life, and the customer’s individual circumstances. This allows for creating payments that can be offset by expected energy savings. Figure 1 shows the potential financial advantages of these alternative financing strategies.
Priority areas for industrial energy efficiency
Once a feasible method of financing has been identified, a business must identify projects in which to invest. Whether making individual energy efficient equipment investments or engaging in an entire facility performance contracting arrangement, businesses need an awareness of which key areas of their infrastructure can offer the greatest payback on energy efficiency initiatives. Businesses should systematically evaluate their own facilities in order to identify the highest priority areas for their sites as a one-size-fits-all approach does not exist. Key areas include:
- Heating, ventilation and air conditioning
- Biomass heating
- On-site solar and wind power
- Supply voltage optimization
- Power management solutions
- Increased factory or process automation
- Intelligent lighting controls and low-energy lighting
- Building controls
- Monitoring and targeting systems
- High-efficiency motors
- Variable speed drives.
We have been able to quantify the advantages, in terms of saved electricity costs, of adopting variable speed drives (VSDs).
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Before the calendar turned, 2016 already had the makings of a pivotal year for manufacturing, and for the world.
There were the big events for the year, including the United States as Partner Country at Hannover Messe in April and the 2016 International Manufacturing Technology Show in Chicago in September. There's also the matter of the U.S. presidential elections in November, which promise to shape policy in manufacturing for years to come.
But the year started with global economic turmoil, as a slowdown in Chinese manufacturing triggered a worldwide stock hiccup that sent values plummeting. The continued plunge in world oil prices has resulted in a slowdown in exploration and, by extension, the manufacture of exploration equipment.
Read more: 2015 Salary Survey